Has the pandemic thrown off your expectations for health-care costs this year? Many consumers are spending less than they anticipated because they are postponing elective surgery and/or avoiding routine visits to doctors and dentists. Or they are spending more because of an unanticipated jump in costs related to COVID-19.
If you’re enrolled in a health-care Flexible Spending Account (FSA), miscalculations could mean that you end up forfeiting the unspent amount of the pretax FSA payroll deductions you designated for this calendar year or getting less of a tax break than you could have.
Fortunately, new IRS rules could allow FSA account holders to adjust the amounts that they have designated to be taken out of their paychecks for the remainder of 2020. The new rules also apply to amounts you may have taken out of your paycheck for a dependent-care FSA, which you may have overestimated if, for instance, you are skipping summer camp or have not had daycare expenses while staying at home. What you need to know…
The IRS rules enable—but don’t require—your employer to let you adjust the amount you’re contributing to your FSA in 2020. That could include lowering your contributions, ending them entirely, increasing them, or even opening an FSA if you didn’t sign up for one during open enrollment.
The employer can allow you to “carryover” as much as $550 of the money you contribute to an FSA in 2020 to anytime in 2021, up from the $500 carryover allowed in earlier years. This new increase is permanent and indexed to keep up with inflation.
If you contributed an amount to an FSA in 2019 and didn’t spend it all, you can spend the remaining money on qualifying expenses until the end of 2020 if your employer offers a “grace period.” Ordinarily, such FSA grace periods extend only two and a half months after the end of the plan year—until March 15 for a plan with a December 31 plan-year end date. This change applies only for this year.
Important: As in earlier years, FSAs cannot offer both carryovers and grace periods—employers must choose one, the other or neither.
If you participate in an FSA, contact your employer’s benefits department to check whether it is allowing changes—most employers are expected to do so—and to what extent.
If changes are allowed, determine whether it makes sense for you to adjust the amount you are contributing based on the health-care or dependent-care costs you expect to incur. Consider doing this as soon as possible if you expect to reduce the designated amount—you can’t reduce it below what has already been deducted from your paychecks.
If you contributed to an FSA in 2019 but did not use all the money, ask the benefits department whether you now have a grace period that extends to the end of 2020.
Another new rule for 2020 unrelated to FSAs: Employers can allow employees to make changes to their health-care insurance plan choices in the middle of the plan year, not just during open enrollment. That includes initiating or revoking coverage or changing the type of coverage. Ordinarily, changes can be made in the midst of a year only when employees experience qualifying life events, such as marriage or divorce.